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Markets breathed a sigh of relief after Italy’s populist coalition government calmed fears of an explosive clash with the EU by rowing back on its spending plans.

After Italian government borrowing costs surged to their highest level in more than four years, finance minister Giovanni Tria attempted to soothe investor nerves by pledging to reduce the deficit from 2020.

Anti-establishment Five Star Movement and the far-Right Lega vowed to hold firm on a 2.4pc of GDP deficit in 2019 but the ruling populists will reportedly scale back their plans by lowering the deficit in 2020 and 2021.

The market’s confidence in the government could be restored if the offer is seen as an “opening bid in the discussion...